More Volatility, Questions About Stimulus

The result still looks too close to call until Thursday at the very earliest with delayed postal vote counting likely to be important in key states. Futures on the tech-heavy NASDAQ began the day outperforming, and the dollar rallying with bond yields lower. Further volatility looks likely.

A Trump election win would cause some short-term volatility given investor positioning favoured Biden, but a clear resolution to the election is still likely to be positive overall for risk assets as a whole. Negotiations over fiscal stimulus will resume, and we expect these will be resolved favourably with a smaller and more targeted package than would have followed a Biden ``blue sweep.’’

In the case of a Biden victory and Democrats winning the Senate, we would expect to see a very large fiscal package boost markets. The Democrats would be likely to push forward expansionary programmes of infrastructure and public spending. We would expect the dollar to continue its weakening trend, which combined with a less confrontational approach to global trade, would be beneficial for most Asian and emerging market economies and currencies, particularly China and Mexico. A Biden-led divided government would look to pursue similar policies but would be severely handicapped by a Republican senate.

A potential Trump victory would probably bring the continuation of erratic and confrontational foreign policy, particularly towards China and Mexico. This combined with the reduced threat of a weaker dollar would be more negative for emerging market economies and currencies, in Asia and Latin America in particular, than would have been the case under a Biden ``blue sweep.’’

Once, the election is behind us, the threat of a Covid-19 second wave as the northern US heads into winter will take over as the key market worry.